The Japanese game company has ruled this product generation of consoles with a majority market share ever since it launched the innovative motion-sensing Wii controller and its system in 2006. Because of that popularity, Nintendo has been much slower to cut prices on its console in this generation.

Word of the price cut from the $199 price leaked out last week, so it makes sense for retailers to sell it for the lower price now. Otherwise, Wii sales would dry up as consumers wait for the lower price. Nintendo hasn’t commented yet.

This is the first price cut since September 2009, when Nintendo cut the price from $249 to $199. Target is rumored to be cutting its price on Monday.

And this will likely raise speculation that Nintendo plans to announce a new console to replace the original Wii at the E3 trade show in June. The rumored price cut was to sell the console for $149, so the $169 price is a bit of a surprise.

Michael Pachter, an analyst at Wedbush Morgan, said in February that all three console makers would have to cut their prices this year as demand starts to fade. Nintendo has played the pricing game masterfully in the past. It debuted the Wii at $249, much lower than the initial $599 price for the PlayStation 3 in 2006 and $399 in 2005 for the Xbox 360.

With a cheaper and more innovative console, Nintendo stole the No. 1 position from Sony. To date, Nintendo has sold around 86 million Wiis, compared to 53 million Xbox 360s and 49 million PS 3s. Nintendo has also dominated in handhelds, selling 147 million DS units versus 67 million PlayStation Portables.

Now we’ll see if Sony and Microsoft respond with their own price cuts.

In the last year, Nintendo sold about 7 million Wiis in the U.S. in 2010, compared to 9 million in 2009 and 10 million in 2008. In February, Microsoft sold 535,000 Xbox 360s while Nintendo sold 454,000 Wiis.

It’s natural for the console makers to cut prices over time. The machines are expensive at the outset, since the designers cram as much new technology into them as they can. Sony and Microsoft did this so much that they sold their initial machines at a loss, hoping to make up for that with game sales. Nintendo, on the other hand, has usually priced its hardware to make a profit.

As Moore’s Law (the capacity of a chip doubles every two years) progresses, the console makers can produce the same chips in their machines for a lower cost. So they can reduce the number of parts inside the consoles and cut prices.